First Quarter 2012 Survey of Professional Forecasters

Forecasters See Stronger Labor Market

The outlook for growth in the U.S. economy looks mostly unchanged from that of three months ago, according to 45 forecasters surveyed by the Federal Reserve Bank of Philadelphia. The panel expects real GDP to grow at an annual rate of 2.2 percent this quarter, down from the previous estimate of 2.4 percent. On an annual-average over annual-average basis, the forecasters see real GDP growing 2.3 percent in 2012, down from the previous estimate of 2.4 percent. The forecasters predict real GDP will grow 2.7 percent in 2013, 3.0 percent in 2014, and 3.1 percent in 2015.

Stronger conditions in the labor market accompany the nearly unchanged outlook for real output. Unemployment is projected to be an annual average of 8.3 percent in 2012, before falling to 7.9 percent in 2013, 7.4 percent in 2014, and 6.7 percent in 2015. The estimates for 2012 to 2014 are 0.5 percentage point lower than the projections in the last survey.

On the employment front, the forecasters have revised upward their estimates of the growth in jobs in three out of the next four quarters. The forecasters see nonfarm payroll employment growing at a rate of 160,100 jobs per month this quarter and 141,900 jobs per month next quarter. The forecasters’ projections for the annual-average level of nonfarm payroll employment suggest job gains at a monthly rate of 144,100 in 2012 and 162,900 in 2013, as the table below shows. (These annual-average estimates are computed as the year-to-year change in the annual-average level of nonfarm payroll employment, converted to a monthly rate.)

Real GDP (%)

Unemployment
Rate (%)

Payrolls
(000s/month)

Previous

New

Previous

New

Previous

New

Quarterly data:

2012:Q1

2.4

2.2

8.9

8.4

121.0

160.1

2012:Q2

2.4

2.3

8.9

8.3

126.3

141.9

2012:Q3

2.8

2.6

8.8

8.2

152.4

145.2

2012:Q4

2.7

3.0

8.7

8.1

126.3

161.7

2013:Q1

N.A.

2.8

N.A.

8.0

N.A.

155.9

Annual data (projections are based on annual-average levels):

2012

2.4

2.3

8.8

8.3

123.2

144.1

2013

2.7

2.7

8.4

7.9

N.A.

162.9

2014

3.5

3.0

7.8

7.4

N.A.

N.A.

2015

N.A.

3.1

N.A.

6.7

N.A.

N.A.

The charts below provide some insight into the degree of uncertainty the forecasters have about their projections for the rate of growth in the annual-average level of real GDP. Each chart presents the forecasters’ previous and current estimates of the probability that growth will fall into each of 11 ranges. The forecasters have revised upward their estimate of the probability that growth will fall into the range of 2.0 to 2.9 percent in 2012, 2013, and 2014.

The forecasters’ density projections, as shown in the charts below, shed light on the odds of a recovery in the labor market over the next four years. Each chart for unemployment presents the forecasters’ previous and current estimates of the probability that unemployment will fall into each of 10 ranges. The forecasters have shifted the distributions of density to the left for 2012, 2013, and 2014, indicating expectations of lower unemployment rates compared with their previous estimates.

Forecasters Hold the Line on Their Expectations for Near-Term Inflation

The forecasters expect current-quarter headline CPI inflation to average 2.0 percent, unchanged from the last survey’s estimate. The forecasters predict current-quarter headline PCE inflation of 1.7 percent, also unchanged from the survey of three months ago.

The current outlook for the headline and core measures of CPI and PCE inflation during the next two years remains mostly unchanged. Measured on a fourth-quarter over fourth-quarter basis, headline CPI inflation is expected to average 2.0 percent in 2012, up from 1.9 percent in the last survey, and 2.2 percent in 2013, unchanged from the previous estimate. Forecasters expect fourth-quarter over fourth-quarter headline PCE inflation to average 1.9 percent in 2012, up from 1.7 percent in the last survey, and 2.0 percent in 2013, unchanged from the previous estimate.

Over the next 10 years, 2012 to 2021, the forecasters expect headline CPI inflation to average 2.30 percent at an annual rate. This estimate is lower than that from the last survey, when the forecasters thought headline CPI inflation over the 10-year period from 2011 to 2020 would average 2.50 percent. There is almost no change in the corresponding estimates for 10-year annual-average PCE inflation. Currently, that 10-year estimate stands at 2.15 percent.

The charts below show the median values (the red line) and the associated interquartile ranges (the gray area around the red line) for the projections for the 10-year annual-average CPI and PCE inflation. The top panel shows the downward revision for CPI inflation, from 2.50 percent to 2.30 percent. The bottom panel highlights the virtually unchanged 10-year forecast for PCE inflation.

The figures below show the probabilities that the forecasters are assigning to the possibility that fourth-quarter over fourth-quarter core PCE inflation in 2012 and 2013 will fall into each of 10 ranges. For 2012, the forecasters assign a higher chance than previously that core PCE inflation will fall in the range of 1.5 to 2.4 percent.

Lower Risk of a Negative Quarter

The forecasters have revised downward the chance of a contraction in real GDP in any of the next four quarters. For the current quarter, they predict a 9.5 percent chance of negative growth, down from 16.6 percent in the survey of three months ago. As the table below shows, the panelists have also made downward revisions to their forecasts for the following three quarters.

Risk of a Negative Quarter (%)

Previous

New

Quarterly data:

2012: Q1

16.6

9.5

2012: Q2

17.3

13.4

2012: Q3

17.1

14.7

2012: Q4

17.0

14.8

2013: Q1

N.A.

15.8

Forecasters State Their Views on House Prices

In this survey, a special question asked panelists to provide their forecasts for fourth-quarter over fourth-quarter growth in house prices, as measured by a number of alternative indices. The panelists were allowed to choose from a provided list of indices or to write in their own index. For each index of their choosing, the panelists provided forecasts of growth in 2012 and 2013.

Twenty-four panelists answered the special question. Some panelists provided projections for more than one index. The table below provides a summary of the forecasters’ responses. For some indices, the number of responses (N) is very small. The median estimates for the six house-price indices listed in the table below range from -0.5 percent to -0.1 percent in 2012 and 0.6 percent to 2.9 percent in 2013. In other words, the panelists expect some further, but minor, declines in prices in 2012, followed by a rebound in 2013.

Projections for Growth in Various Indices of House Prices
Q4/Q4, Percentage Points

Forecasters Reduce Estimates for Long-Run Growth in Output and Productivity and Returns on Financial Assets

In first-quarter surveys, the forecasters provide their long-run projections for an expanded set of variables, including growth in output and productivity, as well as returns on financial assets.

As the table below shows, the forecasters have reduced their long-run estimates for the annual-average rate of growth in real GDP. Currently, the forecasters expect real GDP to grow 2.64 percent per year over the next 10 years, down from 2.84 percent in the survey of 2011 Q1.

Similarly, productivity growth is now expected to average 1.85 percent, down from 2.00 percent. Downward revisions to the return on financial assets accompany the current outlook. The forecasters see the S&P 500 returning an annual-average 6.80 percent per year over the next 10 years, down from 7.25 percent. The forecasters expect 10-year Treasuries to return 4.00 percent per year over the next 10 years, down from 4.88 percent. Three-month Treasury bills will return 2.50 percent, down from 3.00 percent.

Long-Term (10-year) Forecasts (%)

First Quarter 2011

Current Survey

Real GDP Growth

2.84

2.64

Productivity Growth

2.00

1.85

Stock Returns (S&P 500)

7.25

6.80

Bond Returns (10-year)

4.88

4.00

Bill Returns (3-month)

3.00

2.50

The Federal Reserve Bank of Philadelphia thanks the following forecasters for their participation in our surveys: